Saturday, November 19, 2011

Fannie and Freddie

A few readers -- including an "Anonymous" several times -- have claimed that the quasi-federal mortgage entities Fannie Mae and Freddie Mac were the real culprits responsible for the 2008 financial collapse. Although these two organizations did invest heavily in subprime and near-subprime mortgages, they were, as I pointed out in the Comments section of this blog, fairly late though substantial participants in the bubble. A recent article in the New York Review gives a whole bunch more facts about the story:

Among other things, the authors (J. Madrick & F. Portnoy) point out that Mae and Mac bought much less risky securities: few CDOs and few really low-rated bonds; they also had a much much lower rate of default than other Wall Street speculators. Also, though they were asked by the Clinton administration to help finance less affluent (hence presumably riskier) home-buyers, they pretty much fulfilled this obligation without resorting to subprimes.

While Mae and Mac definitely need stronger regulation, this goes double for the the rest of Wall Street, and blaming them for the crash is bad, revisionist history, cooked up to take the real culprits off the hook. The best thing we can do is support and strengthen Dodd-Frank, and help Elizabeth Warren defeat Scott Brown in Massachusetts.

Alas I fear that the "Occupy" movement, by failing to produce a constructive program, politics or ideology, will become irrelevant to the cause of containing Wall Street's inherent greed. The very real force of corporate money, in the climate of the Citizens United court decision, is making loosely organized idealism a luxury that we will not be able to afford. I hope that the many creative and militant people in the Occupy ranks will salvage from it a real movement that can be politically effective -- at least as a prod to Democrats and a producer of useful political statements (propaganda, if you will).

6 comments:

Never said that the GSE's were the "real culprits" in the financial crisis. Lehman would have imploded anyways. But the GSE's certainly were one of the main reasons why the real estate bubble grew so large. (What basis do you have for saying that they were "late to the party"?)

It's very contradictory to say they bought "much less risky" securities and at the same time admit that they invested heavily in subprime mortgages. Subprime is high risk!

Take a read of this Cato report if you'd like to learn more about the GSE's.

I read the Cato report, which was interesting. Insofar as the figures are correct, and the definition of "subprime" is generally accepted, I have no argument with any of this. I said in my blog that GSEs (such as Mae and Mac) should be more carefully regulated -- as should private investment firms. We simply can't afford another bailout involving either; we could barely afford the one we just went through.

In terms of their size and quantity of investments, the GSEs perhaps suffered less of a loss than other private speculators -- at least that's what the NY Review article claims. It's very difficult to make an assessment as merely a mathematician. In any case the GSEs did some very questionable things, and they were motivated probably by both greed (their execs were paid at least partly according to the size of business they did) and partly by lending targets assigned by the Feds.

I am going to comment more at length in the blog. Thanks Anonymous for the reference: I have no real argument with you over the culpability of the GSEs, but I have a different view about the role the government has in promoting "the general welfare" of the country.

Yes, I read it. But it didn't provide any argument for why they were supposedly "late" and how that supposedly makes them less of an instigator than Countrywide, Lehman, Bear, etc. You imply that before they got involved, that somehow the market was still just as large and they just started to participate late in the game. This is much different than someone happening to be the last buyer of a dot-com stock back in 2000 right before the NASDAQ crashed.

Being "late" to the party only makes you innocent if the party was already in full rage and you didn't do anything to make it worse. Up until the GSE's started buying billions of subprime debt, the "party" was the equivalent of teenagers drinking wine coolers and light beer. Then the GSE's show up at the "party" and bring bottles of hard alcohol and cocaine. And then somebody gets so wasted that they take the parents' car for a joyride and wrap it around a tree. The nature of the "party" changed alot when the GSE's became buyers of subprime. Without them, Countrywide couldn't have been able to do what it did in such a large way.

Who would you be more upset at, the kids who brought the beer to the party or the ones who brought the hard stuff and the drugs?